Investors Bet $100,000 Cancer Drug Prices Are Here to Stay

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A patient gets a dose of Keytruda in Tampa, Florida.

A patient gets a dose of Keytruda in Tampa, Florida.

Photographer: James Borchuck/Tampa Bay Times/ZUMA Wire

President Barack Obama, prominent cancer doctors and health insurers are all warning about the need to control the surging prices of new drugs.

Drugmakers and their investors aren’t acting worried at all, especially when it comes to cancer medicine.

In the wake of AbbVie Inc.’s $21 billion pact to buy the maker of a $100,000-a-year leukemia drug, the pharmaceutical industry and Wall Street are signaling they don’t expect the brakes on pricing any time soon in the oncology field. Companies that are developing cancer drugs rose in reaction to both the deal and regulatory approval of a $12,500-a-month treatment from Bristol-Myers Squibb Co. for treating a lung malignancy.

“Oncology is a different ballgame,” AbbVie Chief Executive Officer Rick Gonzalez said in an interview. “You’re talking about life and death for these patients, it is not something you want to randomly start to manage in a way that would create risk for those patients.”

While price resistance is hitting some drugs, cancer remains a disease apart. Companies have shown U.S. insurers will routinely pay prices two or three times median household income if the drug is proven to extend life or slow the course of the disease.

Express Scripts Holding Co., which administers prescription benefits for 85 million Americans, has said it wants to get cancer-drug prices down. There are “clear opportunities” to “lower oncology drug costs while improving care for cancer patients,” the company said in a statement Friday.

Valuable Pipeline

AbbVie showed little concern about lower drug prices as it won a bidding contest last week for Pharmacyclics Inc. Its leukemia drug Imbruvica could eventually generate $7 billion in annual sales for AbbVie. Opdivo, the drug that received the U.S. Food and Drug Administration’s nod last week for lung cancer, may prove even more valuable for Bristol-Myers, which already sells it for advanced melanoma, a type of skin cancer.

After a 7 percent gain last week, shares of Bristol-Myers are trading at more than 38 times expected 2015 earnings, twice as much as the S&P 500 Pharmaceuticals Industry Index. With many large drugmakers interested in acquiring cancer treatments, some see the company as a candidate for buyout.

Bristol-Myers shares were up less than 1 percent to $65.69 at 11:52 a.m. on Monday in New York.

“Bristol has been a good takeover candidate for a long time,” said Richard Evans, an analyst at SSR Health, in Montclair, New Jersey. “The pipeline is undervalued.”

Puma, Juno

Michael Giordano, a Bristol-Myers senior vice president for cancer drug testing, would not comment on deal speculation. Success in getting cancer drugs to market “make us very, very confident in our ability to sustain our company as a freestanding company,” Giordano said.

Other companies with cancer drugs rose last week, including Puma Biotechnology Inc., which gained 9 percent, and Juno Therapeutics Inc., which rose 13 percent. Kite Pharma Inc. rose 1.5 percent.

Late last year, AbbVie set off a price war when the company inked a deal with Express Scripts to cover its hepatitis C drug exclusively for a common type of the disease, in exchange for a significant discount. Rival Gilead Sciences Inc., which early this year reached exclusive deals with other health plans, said that U.S. discounts for its hepatitis C drugs would rise to an average of 46% this year from 22% in 2014.

In cancer, “I don’t see the same of dynamics playing out,” AbbVie’s Gonzalez said, because “there aren’t typically identical types of products” for treating the condition.

Winner Takes All

That’s because the FDA’s practice of approving drugs by each cancer type and stage of disease. So even if two cancer drugs are similar on paper, they may still not compete directly because they are approved for slightly different uses.

Another factor that helps keeps pricing up is that cancer doctors tend to exclusively prescribe the drug that is perceived to have the most efficacy for each particular cancer type, even if the advantage is narrow.

“In oncology, it tends to be winner take all,” Evans said. “Whoever has the best efficacy will get all the sales, and that really preserves the pricing power.”

Global spending on cancer drugs rose 28 percent to $91 billion in 2013 from $71 billion in 2008, according to a report by the IMS Institute for Healthcare Informatics. The average cost in the U.S. for a branded cancer drug doubled in a decade to $10,000 a month, the May 2014 report found.

50 Trials

Last week’s extension of Bristol-Myers’s Opdivo to lung cancer furthered its reputation as a leader in a new type of tumor shrinkers called immunotherapies, which target proteins that allow cancer to evade the body’s defenses. Leerink Partners estimates the drugs could eventually bring in $40 billion in annual sales.

Opdivo competes with Merck & Co.’s Keytruda, which also is approved in melanoma, and may vie with rival drugs from Roche Holding AG and AstraZeneca Plc that are still in testing. The FDA’s action made Opdivo the first in the new class approved in lung cancer, which is far more common than advanced melanoma.

Opdivo and other so-called PD-1 inhibitors “will be the biggest class of cancer drugs ever,” said Seamus Fernandez, an analyst at Leerink Partners, in an interview. Bristol-Myers could eventually receive $15 billion in annual sales from cancer immunotherapies, Leerink’s report said.

The company is testing Opdivo in more than 50 trials on more than 7,000 patients with 20 tumor types, Giordano said. The ongoing tests include late-stage trials that could lead to approval in eight additional tumor types, in addition to the two types of cancer the drugs is already approved for.

Price of Survival

It has focused its trials on proving that the drug keeps people alive longer, in addition to proving it shrinks tumors. In the lung-cancer trial that led to the FDA approval, for example, patients who received Opdivo survived a median of 9.2 months versus 6 months for people who had received chemotherapy.

“Society puts a high value on survival data,” said Giordano, the Bristol-Myers vice president.

Yet prices of cancer drugs are rising far faster than the survival benefits, according to a study in the Journal of Economic Perspectives.

The study looked at launch prices for 58 cancer drugs approved in the U.S. between 1995 and 2013. It found that in 1995, cancer patients paid $54,100 for each additional year of life gained through drugs. By 2013, the cost had risen to $207,000 per year of added life.

Rena Conti, a study author and professor of health policy and economics at the University of Chicago, sees little prospect for cancer drug prices to stabilize or decline in the near future, barring a fundamental change in the insurance system or shift in how the U.S. Medicare program for the elderly pays for cancer drugs.

“It is hope in a bottle and you cannot say no to people who are dying,” said Conti.

(An earlier version of this story corrected the share gain for Kite Pharma.)

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